Fraud and Error - ACCA Audit and Assurance (AA)

Summary

This lecture discusses the auditor's responsibility towards fraud and errors in financial statements. Fraud can be financial reporting to boost share prices or misappropriation of assets. Auditors have no specific duty to detect fraud, but should spot material misstatements. Errors should be reported to management, and if material, may lead to financial statement qualifications. The lecture emphasizes the importance of internal controls and integrity in detecting and reporting fraud and errors.

Takeaways

• 📈 The auditor's responsibility towards fraud and error in financial statements is primarily to ensure they are free of material misstatements, whether caused by fraud or error.
• 💼 Fraud can be categorized into two types: financial statement fraud, which might involve overstating profits to boost share prices or secure loans, and asset misappropriation, which involves theft or misuse of company assets.
• 🔍 While auditors have no specific duty to detect fraud, they are responsible for identifying material misstatements that could significantly affect financial statements.
• 🛡 Management is responsible for establishing proper systems and internal controls to prevent or detect fraud, not the auditors.
• 🔑 The likelihood of auditors detecting small, individual instances of fraud is relatively low, but they must be vigilant for material misstatements that could result from fraud.
• 🚨 Upon discovering fraud, auditors must report it to management and assess whether it is an isolated incident or part of a larger, ongoing issue.
• 📊 Errors in financial statements, no matter how small, should be reported to management, as they could potentially lead to material misstatements.
• 🏛️ If management does not correct identified errors, auditors must evaluate the impact of these errors and obtain written representations from management regarding their materiality.
• 🚫 In the event of a material misstatement due to error, and management refuses to correct it, auditors may have to consider qualifying their opinion on the financial statements.
• ❌ If the financial statements contain material misstatements that are not corrected, auditors may need to issue an adverse opinion, indicating that the statements do not present a true and fair view.

Q & A

What is the auditor's responsibility towards fraud and error in financial statements?

The auditor's responsibility is to ensure that financial statements are free of material misstatements, whether caused by fraud or error. They have no specific duty to detect fraud, but they should be aware that it can happen and should follow up on any suspicions.

What are the two levels of fraud mentioned in the lecture?

The two levels of fraud are fraudulent financial reporting, which includes overstating profits to boost share prices or get loans, and misappropriation of assets, which involves theft or misuse of company assets.

Why is it management's responsibility to prevent or detect fraud?

Management is responsible for ensuring there is a proper system and internal control in place to prevent or detect fraud. The auditors' role is to provide reasonable assurance that the financial statements are free of material misstatements.

What should an auditor do if they discover a fraud?

If an auditor discovers a fraud, they must report it to management. They should also investigate whether it is an isolated incident or part of a larger pattern of fraud within the company.

How does the auditor determine if a misstatement is material?

A misstatement is considered material if it is large enough to influence the decisions of users of the financial statements. The auditor should be alert to any misstatements and assess their materiality.

What is the auditor's approach to errors in financial statements?

The auditor should identify all misstatements, even very small ones, and report them to management. Errors should be corrected, but if they are immaterial, the auditor may not insist on their correction.

What happens if management does not correct a material misstatement?

If management does not correct a material misstatement, the auditor may have to consider qualifying the financial statements, indicating that they do not present a true and fair view.

Why is it important for the auditor to be aware of the susceptibility of a company to fraud?

Being aware of the susceptibility to fraud allows the auditor to plan the audit accordingly and to be more vigilant in areas where the risk of fraud is higher.

What is the role of internal controls in preventing fraud?

Internal controls are designed to prevent or detect fraud by ensuring proper authorizations, segregation of duties, and other checks and balances within the company.

How does the auditor ensure that the financial statements show a true and fair view?

The auditor ensures a true and fair view by identifying and addressing material misstatements and by obtaining written representations from management that they believe the financial statements are accurate.

What is the significance of the auditor's statement that the financial statements are free of material misstatements?

This statement provides reasonable assurance to stakeholders that the financial statements are accurate and reliable, but it is not a guarantee. It reflects the auditor's professional judgment and the results of their audit procedures.